Apple Is Missing Out on the AI Rally. Why It Has No Good Options.

Apple shares have fallen nearly 5% over the past 12 months. (SCOTT OLSON/Getty Images)

Apple is struggling to adapt to the new world of artificial intelligence. While the iPhone maker is seeking to develop its own AI, it is also considering integrating a third party-product or buying an existing start-up in the field, giving it three problematic options.

The stakes are high. Apple has repeatedly delayed promised AI updates to Siri, its digital assistant. That has undercut hopes that the technology will be a trigger that can revive growth in iPhone revenue, which has stagnated since hitting $205 billion in Apple’s fiscal 2022.

The holdup is spurring concerns that rivals could chip away at its seemingly impregnable brand loyalty. Alphabet’s Google is pushing frequent AI updates onto Android-powered devices such as those made by Samsung Electronics, while Chinese smartphone makers are all integrating the technology into their own flagship phones.

Meanwhile, a device developed specifically for AI might at least partially displace smartphones. That was part of the reason for a downgrade of Apple stock from Needham analyst Laura Martin last month. She argued OpenAI’s acquisition of a start-up owned by Jony Ive, Apple’s former chief design officer, for $6.4 billion, was likely to result in a genuine alternative to smartphones.

Given all that, Apple is considering sidelining its own technology and upgrading Siri with AI provided by OpenAI or Anthropic, Bloomberg reported on Monday, citing people familiar with the discussions. The outlet also reported that Apple has considered buying the AI search start-up Perplexity.

Apple didn’t respond to a request for comment on Tuesday. Its shares were up 2.2% at $209.64 in morning trading, but are down 16% this year so far.

Relying on an external AI provider would be a major and potentially dangerous shift for a company that has generally prided itself on its ability to maintain strict control over its own platforms. “If Apple uses technology that is owned by a 3rd party, it will have introduced a large risk into its business model over which it has no control,” wrote Richard Windsor, an independent analyst who publishes Radio Free Mobile, on Tuesday.

OpenAI is backed by Microsoft, while Anthropic has received significant funding from Amazon.com. Relying on either start-up could ultimately leave Apple vulnerable to being dependent on a competitor were its AI provider to be acquired.

That could make acquiring Perplexity look like the more attractive option. However, Perplexity has specialized in search technology, while Apple already has a longstanding and lucrative arrangement with Google. Apple receives a percentage of Google’s ad revenue from searches on its devices. The arrangement led to a $20 billion payment from Google to Apple in 2022, according to court filings.

“Given Apple’s AI efforts have been a bit underwhelming, we believe a [Perplexity] deal would likely be construed as defensive in nature, not a positive catalyst,” wrote UBS analyst David Vogt in a recent research note last Wednesday.

Vogt noted that Perplexity has been reported to be valued at $14 billion, which would make it Apple’s most expensive acquisition by far in its history, although it would represent just over 10% of Apple’s annual free cash flow. Perplexity is also partially dependent on third-party AI models.

News Corp, the owner of Barron’s publisher Dow Jones, has sued Perplexity, alleging copyright infringement. News Corp also signed a multiyear partnership with OpenAI in March 2024.

Write to Adam Clark at adam.clark@barrons.com